Five9 Earnings: International Expansion and AI Growth Offset Soft Demand From Installed Base

We maintain our $59 fair value estimate for no-moat Five9 FIVN following fair third-quarter 2023 results that narrowly missed our top-line growth and profitability expectations. Five9 continues to benefit from the ongoing secular tailwind of contact center operations shifting from on-premises to the cloud. We still think cloud penetration in this market is around 20%, leaving significant greenfield opportunity for Five9 to grow, and rising interest in AI is accelerating demand from enterprises looking to make the cloud transition. This has started to emerge with 150% year-over-year growth in Agent Assist bookings with positive reports on the AI Summaries capability. Shares traded up over 4% after hours to $59, exactly at our current fair value estimate.

Revenue in the third quarter increased 16% year over year, as Five9′s march up market continues to bear fruit with larger deals along with continued international momentum largely driven by the firm’s global partners. Offsetting some of that growth was typical lumpiness in professional services revenue along with macro headwinds. Consumer discretionary spending amid macroeconomic headwinds grew at 1% in September, the lowest of the year according to JPMorgan Chase data, hindering contact center demand. This factor, along with low growth in the firm’s existing install base came through in another dollar-based retention decline, which was down 2 points sequentially to 110% for the quarter.

The difficult macro also came through in Five9′s adjusted EBITDA margin, which declined approximately 60 basis points year over year to 17.9%. Adjusted gross margins have also been suffering but largely due to upfront incremental investments to gain new business, a strategy we view as prudent at this stage of Five9′s growth trajectory.